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Oct IIP, Nov inflation and RBI policy: Experts decode all

This week was a heavy one with industrial output data, November inflation and a credit policy.

In an interview with CNBC-TV18s Latha Venkatesh, economist Ajay Shah, senior fellow, NIPFP and Seshagiri Rao, joint MD and group CFO, JSW Steel, discuss the data and give their outlook going forward.

Below is the edited transcript of the interview on CNBC-TV18.

Q: What do you make of industrial growth? How bad is industrial growth?

Shah: I think all of us should be much more sceptical of IIP numbers than we have been. My favourite way to make sense of what is going on in the economy today is I look at year-on-year quarterly top-line growth of the listed companies.

The advantage here is that every single company releases quarterly results. That is seen by an auditor, it is submitted to the exchange. So, it is relatively high quality data.

Now, when I add up all the companies, excluding the financials, if we take all the non-financial firms then for the July-August-September quarter we get a top-line growth of 9% in real terms. This is starkly different from -5% IIP.

So, I am pretty convinced that IIP is really wrong. We have a slowdown in the economy, we have problems in the economy, but we are definitely not in the -5% territory

Q: The capital goods index is showing a dismal -6.8% in September and -25% in October. The GDP number, equally untrustworthy, had indicated that the investment numbers are beginning to decline. What is your take on investment?

Shah: I think there is incipient trouble in investment. The best source for getting a grip of this is the new project announcements and shelving of projects that we see in the CMI capex database.

We see a striking result in the latest quarter, the July-August-September quarter, the initiation of new projects by the private sector net of shelving of old projects has gone roughly to zero. That is really something to worry about.

I would like to emphasise that this is the situation on brand new projects. There are lot of older projects that continue to get executed.

Q: Would you say that about 10% growth is what industry is seeing at this point in time? What is your sense about the second half?

Rao: We are definitely seeing a slowdown structurally as far as the industry is concerned, particularly the steel industry� a barometer for industrial activity.

Last year, the steel industry grew by almost 10.8% in terms of demand and in terms of production. In the first six months of the year, we have seen 1.9% growth. So, I wouldn�t say that the IIP numbers are not showing the trend. It may not be a negative number and we can debate on that number whether it is right or wrong. We are seeing a clear sense of slowdown relative to last year.

Similarly, on investment activity side, I am not seeing any group announcing any new project and aggressively pursuing those projects. Projects, which have been taken up and are under early stages or in the advance stages of implementation, are getting completed or getting implemented. But I am not seeing a big activity in the investment side.

So, these numbers in my view appears to be showing the correct trend as far as the investment cycle is concerned.

Q: KV Kamath was saying that even in 2008 he saw a lot of projects going from the front burner to the back burner, but in the last few months he had seen projects go off burner. Now that is serious. Would you say that infrastructure is actually shrinking?

Rao: This is absolutely correct because the interest rates have gone up so high, projects are becoming unviable to go ahead and the credit not available. Internationally even to raise foreign currency loans becoming increasingly difficult. Also, policy is not very supportive.

So, taking those factors into account, entrepreneurs or the Indian industry are holding back their investments and looking towards improvement in the international scenario. They are also looking at removal of uncertainties and some policy initiatives.

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